Dual distribution occurs where a supplier sells goods or services both directly and through independent distributors, thereby competing with these independent distributors on the downstream market. A classic example would be that of a manufacturer of a clothing brand who sells these clothes in his own stores but also relies upon independent retailers to sell the clothes in their stores.
Dual distribution is hardly a new phenomenon. Already in 2010, it was applied by manufacturers for various reasons. To set an example for their independent distributors in so-called “flagship stores”, to offer more choice to the end-customers, etc. Over the past decade, however, dual distribution has become increasingly important due to the significant increase in online sales.
The increased use of dual distribution has led the European Commission to examine whether the existing legal framework is still adapted to the changed market conditions, but it has also prompted stakeholders to point out certain shortcomings of the legal framework. This countdown discusses the specific market share limit for dual distribution as introduced by the draft revised VBER published in July 2021.
The current Vertical Block Exemption Regulation (the “VBER”) excludes vertical agreements entered into between competitors from the block exemption, but specifically provides in Article 2(4) that dual distribution agreements are covered by the safe harbour for vertical agreements.
The general market share limit of 30% stipulated in Article 3(1) of the VBER also applies to dual distribution agreements.
With the aim of narrowing down the safe harbour for dual distribution arrangements, the European Commission proposed in July 2021 to exclude all information exchanges from the benefit of the block exemption for dual distribution, unless the parties’ aggregate retail market share is below 10%. When this market share limit is exceeded, any exchange of information between the parties to a dual distribution arrangement would have to be assessed under the rules applicable to horizontal agreements (Articles 2(4) and 2(5) of the draft revised VBER). In other words, in addition to the general market share limit of 30% a new 10% retail market share limit would be introduced for information exchanges.
The European Commission’s proposal to introduce this additional 10% limit was heavily criticized.
In the Distribution Law Center’s observations on the draft revised VBER and Vertical Guidelines in the context of the European Commission’s public consultation it is pointed out that the choice of a limit of 10% with reference to the De Minimis Notice is remarkable in a block exemption context. Furthermore, one would have expected to find here at least the 15% safe harbour limit applicable to joint commercialization agreements pursuant to the Horizontal Guidelines (see paragraphs 240-241).
The Distribution Law Center further observed that the introduction of a market share limit on the downstream retail market is at odds with the regime currently in place, where the buyer’s market share in relation to the 30% market share limit is measured on the purchasing market and not on the downstream market. The arguments for this approach are equally applicable in the context of dual distribution. Defining the relevant retail market and measuring retail market shares correctly is notoriously complicated in practice. It requires considerable fact finding and on retail markets with a narrow geographic scope (local or regional) market shares might be subject to considerable fluctuations that are outside the control of the parties (the opening or closure of one additional competing retail store may bring the parties above or below the threshold overnight).
Additionally, the Distribution Law Center observed that, in order to measure the retail market share correctly, it is necessary to include not only the supplier’s products, but also all competing products. In order to assess its legal position under the block exemption, the supplier would therefore need access to up-to-date and detailed information on the performance of its buyers in terms of competing products. It is the Distribution Law Center’s view that this could trigger a requirement for information exchanges which the current drafts may consider anti-competitive.
For the above reasons, the Distribution Law Center recommended that the dual distribution regime should not be dependent on any market share limit and in any event not on one that is so difficult to define as that pertaining to the retail market. In addition, many stakeholders requested the European Commission to provide more detailed guidance on the types of information that can be exchanged in a dual distribution relationship.
In response to this feedback, on 4 February 2022, the European Commission published a draft new section (also available on the DLC website) to be included in the revised Vertical Guidelines dealing with information exchange in dual distribution. Paragraph 9 of the draft new section states that “if the conditions of Article 2(4), points (a) and (b) of the Regulation are fulfilled, the exemption provided for in Article 2(1) of the Regulation applies to all aspects of the vertical agreement, including any exchange of information between the parties that is necessary to improve the production or distribution of the contract goods or services”.
It is the understanding of the Distribution Law Center that this new language implicitly eliminates the market share limit of 10% from the draft VBER. The new section indeed also states that the revised VBER would include a provision stating that the block exemption generally does not apply “to the exchange of information between the supplier and the buyer that is not necessary to improve the production or distribution of the contract goods or services by the parties”, thus apparently doing away with the 10% market limit as originally foreseen.
The European Commission’s initial proposal to block exempt information exchanges between a supplier and a distributor in a dual distribution arrangement on condition that the parties’ market share is less than 10% seems to have been abandoned. It has been replaced by a carve out from the draft revised VBER of exchanges of information that are not necessary to improve the production or distribution of the contract goods or services.
The adjustment of the draft VBER on the topic of exchanges of information in dual distribution is to be welcomed. Although the Distribution Law Center understands that the European Commission has a concern that a dual distribution scenario may lead to “false positives” (i.e. information exchanges that raise significant horizontal concerns, but are nevertheless block exempted), the introduction of an additional market share limit is not an appropriate way to address such concern. The new test, where the draft VBER would cover exchanges of information necessary to dual distribution, is an improvement, also because examples are given in the draft revised Vertical Guidelines.
The “DLC countdown” newsletters are offered to you by HAVEL & PARTNERS.
If you need more information or our assistance with setting up the distribution system, please contact Robert Neruda or Štěpán Štarha, who are the firm’s partners responsible for this area.
WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.
The World Trademark Review 1000 has ranked HAVEL & PARTNERS among the top IP and trademark firms for the fourth time in a row. The specialised team for this area is mentioned in the ranking among the best law firms in the Czech Republic and Slovakia. And at the same time, four of the firm’s IP professionals also succeeded individually in the ranking, being rated among the top professionals in this area in the Czech Republic and Slovakia.
In addition to the excellent ranking of the firm’s entire team in the Czech Republic and Slovakia, the World Trademark Review 1000 lists partners Ivan Rámeš and Robert Nešpůrek and senior associate Tereza Hrabáková in its rankings of the best IP and trademark specialists for the Czech Republic. In Slovakia, it ranked partner Štěpán Štarha among the best specialists in this area.
“I am very pleased that our advisory group continues to be ranked as one of the best practices in the Czech Republic and for the first time has also achieved recognition in Slovakia,” said Ivan Rámeš, who was ranked, regarding this year’s results. “Once again, we have been able to demonstrate that our work is of exceptional quality and that we are able to assist our clients in even the most challenging cases, whether it be complex transactional or contractual advice or large IP disputes.”
Intellectual property law has long been one of the firm’s most important specialisations. The team of 15 experienced professionals is one of the largest ever advisory groups with this specialisation in the Czech Republic and Slovakia. It works for global brands, as well as major Czech and Slovak companies and prospective start-ups, for which it provides legal services in connection with the effective protection of intellectual property, ranging from the registration and management of a portfolio of industrial rights anywhere in the world through enforcement to comprehensive strategic advice. In recent years, the number of IP transactions and IP litigation matters has also been growing, which provides an opportunity to engage the dozens of other lawyers who are dedicated to these areas at HAVEL & PARTNERS.
The M&A team of HAVEL & PARTNERS led by Václav Audes (Partner) and Juraj Petro (Senior Associate) assisted the investment fund Lighthouse Ventures in the sale of PEKAT VISION. The buyer was the Italian company Datalogic. The value of the transaction reached CZK 400 million.
The sale of the company brought significant appreciation of the investment to Lighthouse Ventures. “PEKAT VISION is the first company we have invested in, and the first company we have sold. We are very happy that the investors who trusted us have received their investment back with an eightfold appreciation compared to the initial value, in less than three years,” says Michal Zálešák, founder and managing partner of Lighthouse Ventures, commenting on the transaction.
The Lighthouse Ventures investment fund focuses on technology companies with a global vision. It provides start-ups not only with funding, but also with a wide network of contacts and experience of an international team of partners, mentors and advisors.
PEKAT VISION, a Brno-based start-up, has developed innovative software that can automatically detect defects in products coming off the production line. With the help of artificial intelligence, it recognises a product that differs from the model. The unique technology helps companies improve and automate the production process in various sectors, from manufacturing to transport and logistics to retail stores.
Dual distribution occurs where a supplier sells goods or services both directly and through independent distributors, thereby competing with these independent distributors on the downstream market. A classic example would be that of a manufacturer of a clothing brand who sells these clothes in his own stores but also relies upon independent retailers to sell the clothes in their stores.
Dual distribution is hardly a new phenomenon. Already in 2010, it was applied by manufacturers for various reasons. To set an example for their independent distributors in so-called “flagship stores”, to offer more choice to the end-customers, etc. Over the past decade, however, dual distribution has become increasingly important due to the significant increase in online sales.
The increased use of dual distribution has led the European Commission to examine whether the existing legal framework is still adapted to the changed market conditions, but it has also prompted stakeholders to point out certain shortcomings of the legal framework. This countdown discusses the extension of the dual distribution exception to wholesalers and importers. Countdown no. 16 will focus on the specific market share threshold for dual distribution that was introduced in the draft texts published in July 2021. Finally, countdowns no. 17 and 18 will elaborate on information exchange in the context of dual distribution.
The current Vertical Block Exemption Regulation (the “VBER”) applies to vertical agreements, which are agreements or concerted practices entered into between two or more undertakings which operate, for the purposes of the agreement or concerted practice, at a different level of the production or distribution chain (Article 1(a) VBER).
Consequently, Article 2(4) VBER stipulates that the block exemption does not apply to vertical agreements entered into between competing undertakings. However, an exception is made for dual distribution “where competing undertakings enter into a non-reciprocal vertical agreement and
Thus, under the current regime, the exception does not apply to all forms of dual distribution. The exception of Article 2(4)(a) VBER only applies to situations where the supplier is both a manufacturer and a distributor of goods. Consequently, importers and wholesalers who are not manufacturers cannot benefit from the block exemption when they compete with their independent distributors on the downstream market.
Smaller market players in particular are disadvantaged by this rule. Vertical integration is easier to achieve for market players with greater financial resources. Smaller manufacturers, on the other hand, will be more inclined to use independent importers and wholesalers in order to spread their financial risk. This leads in practice to the unequal treatment of similar vertical agreements. Within the same distribution network, the VBER will apply to some vertical agreements and not to others, even if these agreements contain the same contractual conditions.
Let’s make this practical with an example. Suppose a Finnish car manufacturer wants to distribute its models in the Netherlands and Spain. In Spain, the manufacturer has a subsidiary (importer A) which will import the cars. In the Netherlands, on the other hand, the manufacturer will use an independent importer (importer B). Importers A and B have each set up a selective distribution network. If both importers A and B are also active at the retail level (for instance because they sell directly to larger end-customers or have some dealerships of their own), only the selective distribution network of importer A (because it is an economic unit with the manufacturer) will benefit from the block exemption. The same distribution agreements of importer B, on the other hand, are not covered. On the other hand, if importer B would refrain from direct selling (which paradoxically restricts supply and competition), its selective distribution agreements would be covered by the block exemption.
Because of the above-mentioned problems, the draft VBER now stipulates in Article 2(4)(a) that the exemption applies to non-reciprocal vertical agreements between competing undertakings where the supplier is a manufacturer, wholesaler, or importer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing, wholesale or import level. Thus, the exception that the VBER does not apply to vertical agreements entered into by competing undertakings is extended to wholesalers and importers.
Since the buyer must not be a competing undertaking at the production, wholesale or import level, the parties are only allowed to compete at the retail level. As a consequence, a manufacturer which is also an integrated importer/wholesaler and which, for example, appoints an independent importer/wholesaler in another country, cannot benefit from the exemption for that appointment. On the other hand, the distribution agreements between the independent importer/wholesaler and the independent dealers with whom the wholesaler competes would be covered.
The European Commission has addressed the request of stakeholders to extend the scope of the exception Article 2(4)(a) VBER to importers and wholesalers (for their downstream agreements). This extension is definitely an applaudable change which, to a certain extent, reduces the unequal treatment of similar vertical agreements, but it becomes clear in the above example that the European Commission has not provided a conclusive solution. Still not all vertical agreements within the same distribution network will be able to benefit from the legal certainty of the block exemption.
The “DLC countdown” newsletters are offered to you by HAVEL & PARTNERS.
If you need more information or our assistance with setting up the distribution system, please contact Robert Neruda or Štěpán Štarha, who are the firm’s partners responsible for this area.
WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.
Authors: David Krch, Martina Sumerauerová, Zuzana Zavadilová
As you have probably noticed in the media, the Czech Government announced a package of three major measures in response to the significant increase of fuel as a response to the situation in the Ukraine.
As we expect these measures to impact your business, we would like to provide you with more details:
In addition, the Minister of Finance announced that transport companies will be able to postpone the payment of the value added tax (“VAT”) if they are not able to pay the VAT by the legal deadline. The first postponement should be applicable for VAT paid by 25 April 2022.
Please let us know if you have any questions. We are monitoring the legislation process and we will keep you updated regarding any new developments. Nevertheless, we expect that the proposed legislation changes will be approved.
Author: Hana Erbsová
Source: Epravo.cz
Unfortunately, it is no longer just technology and taxes but more recently also the current war in Ukraine that impact the world of cryptocurrencies.
Virtual assets, or crypto assets, which include so-called cryptocurrencies, are currently often mentioned in connection with international sanctions against the Russian Federation. Let us remind you, therefore, that by its decision of 9 March 2022, the Council of the EU explained that the prohibition to grant loans and credits in relation to sanctioned goods and technologies and the prohibition to grant loans and credits to entities and persons listed in the EU Sanctions Regulation applies to any means by which credit or loans can be granted, including crypto assets.
The manner in which this clarification has been made (by way of interpretation) suggests that the same approach should be taken in applying the international sanction banning loans and credits not only to Russia but also to other countries and persons sanctioned by the European Union. That is to say, loans and credit in the form of crypto assets should not be granted to them either.
By contrast, the extension of the concept of “transferable securities” to include cryptocurrencies applies only to sanctions applied to Russia until the Council similarly amends the legislation imposing sanctions on other sanctioned countries and entities.
Sanctions specifically targeting cryptocurrencies have not yet been adopted. However, this certainly does not mean that it would be possible to avoid or circumvent existing sanctions.
Trading with or providing any payout (including crypto assets) to recipients linked to Russia is generally restricted by Article 11 of Regulation (EU) No. 833/2014 as in force on 14 March 2022. This Article prohibits the satisfaction of any claim arising out of a contract or transaction the performance or completion of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation and which is made by any “Russian person, entity, or body” (whether on its own behalf, through an agent, or on behalf of a third party).
Therefore, anyone who believes that a payout they are expected to provide may fall within the scope of the aforementioned Article is, in principle, obliged to notify the Financial Analytical Office pursuant to the Act on the Implementation of International Sanctions (Act No. 69/2006 Sb). The Office will then decide whether the assets can be surrendered (whether the payment can be made) or how it will be treated. The above obligation thus also applies, for example, to operators of cryptocurrency exchanges and bureaus of exchange and providers of electronic wallets who suspect that a “Russian person, entity or body” has or may claim crypto assets exchanged, traded or deposited with them. The burden of proving that the transaction will not violate an international sanction lies with the person requesting the payout.
Classic notions in the world of vertical agreements are those of “active sales” and “passive sales”. Active sales involve some form of active targeting of a particular customer group or territory. Passive sales consist of transactions in response to unsolicited requests from individual customers without having initiated the sales by means of active targeting of such customers.
In order to protect efforts and investments made by exclusive, but non-selective distributors, the block exemption regime accepts under strict conditions that other distributors may be obliged to refrain from active selling into the territory or to a customer group that is allocated to an exclusive distributor. Passive sales by such other distributors are however always blacklisted.
This countdown deals with the last of three conditions (the rolling over prohibition) that must be met to render active sales restrictions compatible with the block exemption and thus automatically exempted under the EU competition rules. Given the complexity of the matter, the two other conditions (the exclusivity requirement and the parallel imposition requirement) have been addressed in the two previous countdowns no. 12 and 13.
The current Vertical Block Exemption Regulation (the “VBER”) places the imposition of restrictions on active and passive selling in principle on the black list. There is however a limited exception, that is subject to stringent cumulative conditions.
The first condition is that the active sales restriction must target a territory or a customer group that is either reserved to the supplier or exclusively allocated to a particular (single) distributor (see DLC countdown no. 12). This is referred to as the “exclusivity condition”. The second condition requires that the active sales restriction is imposed on all of the buyers of the supplier (including all of the companies belonging to the same group of companies) (see DLC countdown no. 13). This is called the “parallel imposition requirement”.
The third condition is that the active sales restriction can only be imposed on the (direct) buyer of the supplier. This will typically be the distributor appointed by the supplier. The supplier is not entitled to require from its distributor that it imposes, in turn, an active sales restriction on its own customers. Hence the imposition of an obligation on distributors to roll over the active sales restriction to the next level is not compatible with the block exemption of active sales restrictions. This is typically referred to as the “rolling over prohibition”.
The Commission proposals amend the third condition.
The proposals entitle the supplier to require that an active sales restriction is imposed also on the customers of a party that was given distribution rights by the supplier. This means that a supplier can require from its distributors that they pass on or roll over the active sales restriction to the next level.
The text seems to suggest that this passing on or roll-over possibility is limited to one level. In other words, the supplier cannot require that its distributor imposes an active sales restriction on its immediate customer and, in addition, require that these customers must also impose the active sales restriction on their customers.
This may all sound complicated and that is also what it is. A practical example may clarify matters.
Imagine that a producer of high-tech TV-sets appoints an exclusive distributor in each major city of the EEA countries. The producer requires particular investments and efforts of these distributors for which the producer wishes to offer some form of contractual protection. The protection takes the form of active sales restrictions that are imposed on the various distributors. Exclusive distributors are protected against active marketing by other distributors within their city. Under the current regime, it is possible that the distributor sells the TV-set to a trader in his city and such trader can then not be held to any active sales restriction. In other words, the supplier cannot require that his distributors impose the same active sales restriction on their customers (here: the trader).
This is changed in the current proposals. The supplier can require that the distributors pass on or roll over the active sales restriction to their customers. If that happens, the distributor in our example must impose the same active sales restriction on the trader. This implies that the trader will be contractually prevented from making active sales in other cities in which an exclusive distributor has been appointed.
The creation of room to pass on or roll over active sales restrictions provides a response to the concerns expressed in the Expert Report. The Expert Report emphasized that in many real life scenarios the current regime is impractical and ineffective. Several Distribution Law Center contributors provided concrete examples of scenarios where, without such a passing on or roll over possibility, protection against freeriding is simply not working. The concerns applied in particular in the context of distribution set-ups that are not homogenous, e.g. with wholly owned importers in some Member States and independent importers in other. The proposals address also the concern that it is easy to circumvent the active sales restriction by making use of a reseller or trader who then in turn is free to engage in active selling wherever he wants.
The formulation in the current proposals may trigger interpretation difficulties. The passing on is only allowed with regard to customers of “a party that was given distribution rights by the supplier”. There is no doubt that this applies to distributors appointed by the supplier directly. However, how about the customers of a distributor appointed by an independent importer which in turn is appointed by the supplier? Are the customers of the distributor customers of “a party that was given distribution rights by the supplier”? The same question applies one level down. Imagine that the distributors of the supplier work with sub-distributors. Is it possible to extend the obligation to impose the active sales restriction to customers of the sub-dealers? Hopefully the definitive version of the new Vertical Guidelines will clarify the position in this respect. We find ourselves in a hardcore environment where legal certainty is essential.
The “DLC countdown” newsletters are offered to you by HAVEL & PARTNERS.
If you need more information or our assistance with setting up the distribution system, please contact Robert Neruda or Štěpán Štarha, who are the firm’s partners responsible for this area.
WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.
Classic notions in the world of vertical agreements are those of “active sales” and “passive sales”. Active sales involve some form of active targeting of a particular customer group or territory. Passive sales consist of transactions in response to unsolicited requests from individual customers without having initiated the sales by means of active targeting of such customers.
In order to protect efforts and investments made by exclusive, but non-selective distributors, the block exemption regime accepts under strict conditions that other distributors may be obliged to refrain from active selling into the territory or to a customer group that is allocated to an exclusive distributor. Passive sales by such other distributors are however always black-listed.
This countdown deals with the second of three conditions (the parallel imposition requirement) that must be met to render active sales restrictions compatible with the block exemption and thus automatically exempted under the EU competition rules. Given the complexity of the matter, the first condition (the exclusivity requirement) was addressed in the previous countdown no. 12 and the remaining third condition (the roll-over prohibition) will be addressed separately in the next countdown no. 14 .
The current Vertical Block Exemption Regulation (the “VBER”) places the imposition of restrictions on active and passive selling in principle on the black list. There is however a limited exception, that is subject to stringent cumulative conditions.
The second of such conditions requires the supplier (and all of the companies that directly or indirectly control the supplier or are controlled by the supplier) to impose the same active sales restriction on all of its buyers within the EU. Practically speaking, if a supplier designates an exclusive distributor in Finland and it wishes to protect the distributor against active sales by the distributors located in the other Scandinavian countries, it will have to impose an active sales restriction towards Finland not only on the other Scandinavian distributors, but on all of its distributors that are located anywhere in Europe.
This second condition is often referred to as the parallel imposition requirement.
It is important to add that the parallel imposition requirement does not apply to the supplier itself. In other words, it is not necessary that the supplier accepts to refrain from engaging in active sales to (in our example) Finland. The requirement applies only to all of the buyers within the EU.
It is interesting to note that this condition is not stated in the VBER itself, but only in the Vertical Guidelines.
The Commission proposals are confusing in respect of the second condition. It is simply unclear whether the parallel imposition requirement remains in place or is abandoned.
The definition of “exclusive distribution” seems to put the requirement aside by referring to “other buyers” and not to “all the other buyers”, which is the language of the current Vertical Guidelines. However, the language included in several paragraphs of the proposed new Vertical Guidelines creates doubts and could still be read as leaving the second condition intact.
This is an issue of considerable practical importance. In the Expert Report submitted on the issue of territorial and customer restrictions we highlighted the practical difficulties with implementing the parallel imposition requirement. These difficulties apply in particular to existing distribution networks that have evolved over time.
The failure to comply with this second condition turns the active sales restriction into a hardcore restriction and places it on the black list. Returning to the example of the exclusive distributor in Finland, the failure to include the active sales restriction towards Finland in the distribution agreement concluded with a distributor located in Barcelona, Nice or Valletta brings the black list into play. This is difficult to comprehend.
Abstraction being made of the fact that we fail to see the economic justification for the very rigid second condition (the parallel imposition requirement), it is in any event desirable that the future regime tackles the issue head on. It must be clear whether the second condition is still part of the future regime or whether it is being abandoned. This will require appropriate clarifications in the future Vertical Guidelines.
The “DLC countdown” newsletters are offered to you by HAVEL & PARTNERS.
If you need more information or our assistance with setting up the distribution system, please contact Robert Neruda or Štěpán Štarha, who are the firm’s partners responsible for this area.
WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.
The HAVEL & PARTNERS team acted as legal counsel to investors in a Series A investment round in which the Czech travel start-up Daytrip raised new capital totalling EUR 6.14 million. Daytrip is a global platform that offers tourists in 85 countries worldwide private transport with local drivers directly in the places people visit.
The firm’s partner Václav Audes, together with associate Josef Bouchal, provided complete legal services related to the investment in Daytrip for the Budapest-based fund Euroventures, which led the investment round and invested its assets in the travel platform together with other investors, namely J&T Ventures, Nation 1 VC, and Pale Fire Capital.
Euroventures is one of the longest-established leading venture capital firms in Central and Eastern Europe, investing in innovative and fast-growing companies in the region through its Budapest office.
Daytrip plans to use the investment for its further growth. The company has been operating since 2015. It offers tourists in destinations around the world an alternative to conventional modes of transport, and more than 300,000 people have already used its services.
Authors: David Krch, Kateřina Havlínová, Jan Macháček
In connection with the conflict in Ukraine, we have prepared a tax summary of how charitable support in the form of monetary and non-monetary donations is currently treated from the perspective of both companies and individuals, especially for the purposes of the correct application of tax deductions.
Early this week, the Ministry of Finance of the Czech Republic presented a draft amendment to the Income Tax Act, which is intended to ensure more favourable tax treatment for a wider range of recipients and purposes of donations, including a higher percentage of possible deductions. The amendment should be applicable for 2022, even retroactively for donations already made. Thus, individuals can claim donations in the tax return filed for 2022, while companies can claim donations in respect of their respective taxable periods provided that the donation was provided in 2022. The proposed temporarily effective amendment to the Income Tax Act will also allow tax residents of Ukraine to claim the deduction if they prove that their income from the Czech Republic constitutes at least 90% of their taxable income.
If you choose to make a donation as a company or individual, whether in the form of money or other material gifts, the value of the donation cannot be deducted as an expense for income tax purposes. However, under certain conditions, you can reduce your income tax base and therefore “save” on the resulting tax, or potentially increase the amount of support provided by the value of tax saved.
If the conditions for the recipient of the support and its purpose are met, you can still reduce your tax base as a company up to 10% of the tax base in aggregate (the value of the donation must be at least CZK 2,000), as an individual (citizen) up to 15% of the tax base (the value of the donation must be at least 2% of the tax base or at least CZK 1,000). Temporarily, for the year 2022 (and for the tax period ending between 1 March 2022 and 28 February 2023 in the case of companies respectively), the amendment will reintroduce the possibility of a deduction of up to 30% of the tax base.
The proposed amendment also extends the application of the income tax exemption to the recipient of the donation, including for situations where the donation is received in support of the defence efforts of the State of Ukraine; up to now, the narrowly defined conditions for obtaining the exemption had to be met for humanitarian and charitable reasons. The above is also important from the perspective of the donor, who would otherwise have to apply withholding tax under the current legislation (which would be complicated to calculate in the case of many non-monetary donations).
The amendment to the Income Tax Act should also introduce the possibility of direct tax deductibility of the cost of a non-monetary donation made in support of the State of Ukraine and its citizens in connection with the armed conflict on its territory, the type of recipient will not be restricted provided that the condition that the donation is made for the same purpose as mentioned above is met. This may pose a certain simplification in the calculation of any pro rata share of expenses that are otherwise non-tax deductible, and at the same time, if the donor reports a tax loss for the taxable period, it can generally (subject to other conditions) carry it back in the two previous taxable periods or carry it forward to the five subsequent taxable periods, and thus effectively apply the value of such a non-monetary donation to the tax base and reduce the tax liability at a different tax period than claiming a deduction in respect of the donation.
If you provide charitable support as a VAT payer, it is important not to forget about the related tax liabilities. Monetary support provided does not relieve VAT liabilities. If other non-monetary aid is provided to Ukraine (assuming that it is provided “free”, without any consideration), if you claimed a VAT deduction upon procuring such aid, such deduction will continue to be claimable only if the aid is used for humanitarian and charitable organisations and supplied in the Czech Republic, and such organizations will send or transport it to Ukraine as part of their activities outside the EU. In order to prove this case, we recommend concluding at least an agreement or other similar document with the organisation in question, in which both parties declare the purpose of the aid provided and the commitment of the relevant organisation to deliver the material aid to Ukraine for that purpose.
Finally, we would like to summarize the unchanged conditions for proving a donation. The relevant proof should always show the recipient, the value, the subject matter, and the purpose and date of the donation. In this context, we would like to remind you that the date of the donation is the date of the physical transfer of the funds or non-monetary support, not the date indicated on the donation agreement.
Please do not hesitate to contact us with any questions you may have. We will be happy to assist you in assessing whether the relevant conditions are met from a tax perspective.
Classic notions in the world of vertical agreements are those of “active sales” and “passive sales”. Active sales involve some form of active targeting of a particular customer group or territory. Passive sales consist of transactions in response to unsolicited requests from individual customers without having initiated the sales by means of active targeting of such customers.
More concretely, if a distributor sends a publicity letter or mail to a particular customer, he is engaging in active sales when, as a result, that customer places an order. Conversely, if the customer has picked up some general advertising in a magazine and visits the shop of the distributor, the subsequent sale is a passive sale. There are numerous variations on the same theme, but the dividing line in legal terms is clear. It depends on the party that took a targeted initiative to arrive at the transaction. In the case of active selling, it is the distributor who does so. With passive sales, the initiative rests with the customer.
In order to protect efforts and investments made by exclusive distributors, the block exemption regime accepts under strict conditions that other distributors may be obliged to refrain from active selling into the territory or to a customer group that is allocated to an exclusive distributor.
This countdown deals with the first of three conditions (the exclusivity condition) that must be met to render active sales restrictions compatible with the block exemption and thus automatically exempted under the EU competition rules. Given the complexity of the matter, the two other conditions (the parallel imposition requirement and the roll-over prohibition) are addressed separately in the next two countdowns no. 13 and 14.
The current Vertical Block Exemption Regulation (the “VBER”) places the imposition of restrictions on active and passive selling in principle on the black list. There is however a limited exception, that is subject to stringent cumulative conditions.
Before addressing these conditions, it is important to underscore that the exception does not apply to protect selective distributors. Selective distributors cannot be protected against active selling by other distributors (that are active at the retail level) to end users that are located within their territory. Furthermore, the exception covers active sales restrictions, but never passive sales restrictions. The latter are always black-listed.
The first condition is that the active sales restriction must target a territory or a customer group that is either reserved to the supplier or exclusively allocated to a particular distributor. The current Vertical Guidelines make it clear that the exception applies only if the customer group or territory is allocated to one (i.e. a single) distributor. Hence active sales restrictions are not possible if the customer group or territory is shared between more distributors or if the supplier has contractually preserved the freedom to appoint additional distributors.
The parties enjoy absolute freedom when defining the customer group or territory. This makes it easier to ensure that the first condition (one single distributor) is met. In practice, suppliers often work with maps on which the geographic boundaries of the territories are indicated and such boundaries are defined in such a manner that it is easy to prove that the first condition is met.
The Commission proposals amend the first condition in two respects.
The first is that the requirement of having no more than a single distributor in the relevant territory or to whom a customer group is allocated is abandoned. It suffices that a limited number of distributors is appointed for the territory or customer group. This means in practice that so-called shared exclusivity is also covered by the exception that grants a block exemption to active sales restrictions.
The second is that the parties seem to lose some freedom when defining the territory or customer group involved. The proposals state that the number of distributors must be determined in proportion to the allocated territory or customer group in such a way as to secure a certain volume of business that preserves their investment efforts. Needless to say, this new test leaves ample room for debate.
The Commission proposals bring additional flexibility when operating active sales restrictions. There is no need to carve up territories or customer groups in an artificial manner in order to meet the condition of having a single distributor who is then protected by the active sales restriction imposed on other distributors. Situations of shared exclusivity that make eminent business sense can be left intact. A typical example is that of a large city where a limited number of distributors is appointed, but where it would be artificial to carve up the city into separate exclusive territories just to meet the first condition.
The extension of the first condition to shared exclusivity is a clear improvement. It avoids that artificial separations are made, just to comply with a legal requirement and for no other good reason.
The additional test related to the volume of business that should preserve investment efforts is however a much more delicatepoint. Not meeting this test pushes the active sales restriction into the black box of hardcore restrictions, i.e. a restriction of competition by object that renders the VBER inapplicable and stands little chance of being saved by means of an individual assessment . Such a shift (from a safe harbour to the hardcore restrictions of the black box) should not be dependent on a test that leaves so much room for interpretation. In the context of the black box of a block exemption, legal certainty is absolutely key and parties should know up front whether their restriction is in or out of the danger zone.
The position becomes even more complex if one considers the legal consequences attached in the new proposals to the failure to meet this additional test. The draft of the new Regulation suggests that such failure places the active sales restriction on the black list and hence renders the benefit of the block exemption immediately inapplicable. This seems logical and consistent with the legal mechanisms on which the VBER is based. The draft of the new Vertical Guidelines stipulates, however, that the benefit of the block exemption “is likely to be withdrawn”. These positions are inconsistent as a matter of law and the contradiction will need to be resolved in the final texts.
The “DLC countdown” newsletters are offered to you by HAVEL & PARTNERS.
If you need more information or our assistance with setting up the distribution system, please contact Robert Neruda or Štěpán Štarha, who are the firm’s partners responsible for this area.
WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.
Online sales restrictions are under close scrutiny from the European Commission and national competition authorities. It is well established that outright online sales bans are qualified as hardcore restrictions, which cannot benefit from the VBER.
However, also with respect to other online sales restrictions businesses must tread carefully. For example, in a selective distribution system, brand owners may set online sales criteria in order to protect their brand when distributors are selling online. The European Commission provides that such criteria imposed by a brand owner or supplier with regard to online sales must be overall equivalent to the criteria imposed for offline sales in a selective distribution system. This is referred to as the “equivalence principle”.
If those online criteria are considered not to be equivalent to the offline criteria, the VBER position is that brand owner’s distributors are prevented from using the internet to reach more customers, which boils down to an illegal restriction of active or passive sales.
Article 4(c) VBER prohibits the restriction of active or passive sales to end users by members of a selective distribution system. According to the European Commission, within a selective distribution system the selective distributors must be free to sell (both actively and passively) to all end users, also with the help of the internet. In particular with regard to internet sales, the European Commission regards any obligation which dissuades members of a selective distribution system from using the internet by imposing criteria for online sales which are not overall equivalent to the criteria imposed for offline sales as hardcore restrictions. This means that the system cannot benefit from the VBER.
The current Vertical Guidelines explicitly state that the equivalence principle does not require that the criteria imposed for online sales must be identical to those imposed for offline sales, but rather that they should pursue the same objectives and achieve comparable results and that the difference between the criteria must be justified by the different nature of these two distribution modes. This is illustrated by a number of examples in the current Vertical Guidelines.
With regard to the equivalence principle, the European Commission seems to be moving in a new direction by focusing on the actual restriction of the use of the internet. In the current proposals for the Vertical Guidelines, the equivalence test for hybrid distribution scenarios is abandoned.
In the current proposals of the Vertical Guidelines a closer link is made with respect to the prevention of the effective use of the internet. Considering the different characteristics of online and offline sales, a supplier operating a selective distribution system may impose online criteria on its authorized distributors which are not identical to the offline criteria, provided that the authorized distributors are not directly or indirectly prevented from effectively using the internet when selling the contract goods.
The following practical example is included in the current proposals of the Vertical Guidelines:
A supplier may establish specific online requirements to ensure certain service quality standards are complied with, including (i) the set-up and operation of an online after-sales help desk, (ii) a requirement to cover the costs of customers returning the product or (iii) the use of secure payment systems. According to the current proposals of the Vertical Guidelines, such requirements do not amount to a blacklisted customer or territorial restriction.
The equivalence test is abolished and replaced by a new “effective use of the internet” test under the new VBER regime.
We welcome the abolition of the equivalence test and the introduction of a closer link with the actual restriction of the use of the internet. Even though the equivalence principle is not unreasonable, legal certainty is served by the new “effective use” test. For example, it is often difficult to assess what is (not) equivalent, given that online and offline sales are operating in divergent worlds (e.g. is a 7/7 after-sales service in a webshop “equivalent” to a less demanding after-sales service in a physical store?). It may likewise be difficult to compare online and offline requirements in the absence of a relevant “offline” counterpart (e.g. requirements regarding the use of search engines and web analytics software). These interpretation difficulties are cleared with the new test, which will be in the interest of the hybrid distribution strategies of many businesses.
The “DLC countdown” newsletters are offered to you by HAVEL & PARTNERS.
If you need more information or our assistance with setting up the distribution system, please contact Robert Neruda or Štěpán Štarha, who are the firm’s partners responsible for this area.
WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.
